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Rating Action:

Moody's downgrades Tereos' ratings to B1, Negative Outlook

22 Sep 2015

London, 22 September 2015 -- Moody's Investors Service (Moody's) today downgraded the corporate family rating (CFR) of Tereos ("Tereos" or "the Company") to B1 from Ba2 and the senior unsecured rating of the EUR500 million bond issued at Tereos Finance Group I, guaranteed by Tereos to B1 from Ba3. The probability of default rating (PDR) of Tereos was downgraded to B1-PD from Ba2-PD. The outlook is negative. The action concludes the review of the ratings announced on 17 August 2015. The downgrade action reflects the expectation by Moody's of sustainably weaker operating performance and elevated leverage in very challenging market conditions over the foreseeable future.

RATINGS RATIONALE

The rating review was prompted by the on-going deterioration of Tereos' generated EBITDA, which has accelerated over the last two quarters and the deteriorating conditions on the sugar markets. The downgrade reflects Moody's expectation that the recovery in performance might be slow and that credit metrics will remain much weaker in the current financial year than previously expected. The EBITDA fell to EUR 376 million after the first quarter 2015-2016 (on a Tereos reported basis and measured over last 12 months) from EUR 453 million as of 31 March 2015, and from EUR 499 million as of December 2014. Though Moody's recognizes that the currently weak earnings and credit metrics largely reflect the cyclicality of sugar markets, recovering a stronger operating performance is likely to take time even if the transition to the new European sugar Regime implemented from October 2017 onwards is likely to have positive implications for Tereos' cash-flow generation.

While the management still expects to broadly maintain its operating margin in the current financial year, Moody's believes that this will be a very challenging target to achieve. At this point in time Moody's expects an EBITDA materially below 400 million in this financial year. Subsequent improved performance in the following financial year will be primarily dependent on a recovery of sugar prices. Though Tereos' capital expenditures will tend to normalize in the current financial year to levels close to depreciation and working capital inflows should mitigate the lower funds from operations, the free cash-flow will be limited if not negative over the next 12 to 18 months.

Gross leverage as adjusted by Moody's increased to 6.1x as of March 2015 and Moody's expects the leverage to continue to increase after weak first half results and to exceed 7x at the end of the financial year 2015-2016 . In the following financial year, even if sugar prices start to rebound, Moody's expects the leverage to be likely to remain above 6.5x except in case of dramatic increase in sugar prices.

In the other segments, ethanol prices have some recovery potential in Brazil which could also favour better sugar prices on the Brazilian market. However in Brazil the weakening currency will continue to constrain sugar prices expressed in dollars.

In addition Tereos will face debt refinancing needs in particular in the perimeter of Tereos Internacional. The downgrade to B1 also reflects that Tereos' debt maturity profile and its financial structure do not provide significant flexibility for a cyclical company. In addition Tereos Brazilian operations are exposed to a more volatile environment including the current weakness of the Brazilian currency.

On the positive side Moody's continues to consider Tereos as one of the most efficient European sugar operators with operating margins somewhat stronger than most peers for their respective European sugar division. Tereos should be one the few operators that could be in a position to export outside of the EU after 2017. Tereos is also likely to be able to buy beet at a lower price than the currently fixed price for beet after the market reform implemented in 2017 and possibly gain additional profits from increased exports outside of the EU. Nevertheless on current market prices, the profitability of additional production to be exported remains uncertain.

However the leverage will remain elevated in the near term though largely reflecting the trough of the current cycle. The rating also reflects that Tereos' credit metrics are affected by seasonality with inventories close to peak levels at financial year-end. Tereos indicates that its own adjusted leverage would be 0.4x lower at year-end 2015 on a seasonally adjusted basis. The cyclicality is also a key factor in the way Moody's assesses Tereos' credit metrics. At a time sugar prices are very low, the B1 rating will have some tolerance for higher leverage in a trough. We would expect Tereos' leverage to normally be between 5 and 6.5 times for the major part of the cycle to be consistent with the B1 rating category. The downgrade also reflects a low interest cover (EBITA to Interest expense). This ratio (1.3x in 2014-2015) will probably weaken towards 1 or below in the current financial year, which will appear as weak for the B1 category. However Moody's recognizes that the current profitability is constrained by the fixed beet prices under the current regulation.

The bond rating was downgraded to B1 and is now in line with CFR. The removal of the notching for the bond reflects that the bond is primarily used to fund the European sugar assets and is expected to be repaid primarily thanks to the cash-flow generated by these assets. The bond is guaranteed by the holding company Tereos UCA, which does not guarantee the vast majority of the debts of the group. Moody's views The European sugar operations as a stronger part of the business, considering the high level of operating efficiency of Tereos in European sugar markets. Moody's views comparatively Tereos Internacional businesses as having less strong market positions and carrying a very high level of leverage. The leverage of Tereos Internacional was at 7.2x at year-end 2015. While the bond remains subordinated to the bank facilities financing the working capital of the European sugar activities, Moody's analysis also reflects that the drawing of these facilities is only seasonal.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the expectation that Tereos credit metrics are going to be weakly positioned in the near term, with an expected leverage as adjusted by Moody's in excess of 6.5x., over the next quarters. Moody's expects that an improvement of credit metrics will remain dependent on the evolution of sugar prices while free cash-flow is going to be weak preventing debt reduction over the near term. It also reflects that the access to bank financing and capital markets may be more challenging and more expensive than in the past for Tereos Internacional.

WHAT COULD CHANGE THE RATING - UP

Positive pressure on the rating would develop in case of substantial rebound of sugar prices on the world market and in Europe. If Tereos can deleverage towards 5x on a sustainable basis, positive pressure on the rating would be likely to develop. In the near term, if the management appears on track to deliver in this financial year an operating margin not materially weaker than last year's, in turn stabilize leverage at around 6.5x, raise interest cover comfortably above 1 and execute timely refinancing, the outlook could be stabilized.

WHAT COULD CHANGE THE RATING - DOWN

Negative rating pressure could develop if the company's profitability does not recover in the financial year 2016-2017, for instance as a result of world market sugar prices remaining at current levels and if the interest coverage ratio does not recover to above 1.5x over time. Failure to reduce leverage to comfortably below 6x after the new European regulation is implemented in October 2017 could also create negative pressure. In the near term, negative pressure could also develop if Tereos does not maintain an adequate liquidity.

The principal methodology used in these ratings was Global Protein and Agriculture Industry published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
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Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
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Moody's downgrades Tereos' ratings to B1, Negative Outlook
No Related Data.
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